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Institutional quality mediates the effect of human capital on economic performance

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  • Adams-Kane, Jonathon
  • Lim, Jamus Jerome

Abstract

This paper considers the relationship between institutional quality, educational outcomes, and economic performance. More specifically, it seeks to establish the linkages by which government effectiveness affects per capita income, via its mediating effect on human capital formation. The empirical approach adopts a two-stage strategy that estimates national-level educational production functions that include government effectiveness as a covariate, and then uses these estimates as instruments for human capital in cross-country regressions of per capita income. The results identify a significant and positive effect of human capital on per capita income levels, and partially resolves the inconsistency between macro- and micro-level studies of the effect of human capital on income. The results also remain robust to alternative specifications, extension to a panel setting, subsamples of the data, and fully endogenous institutions.

Suggested Citation

  • Adams-Kane, Jonathon & Lim, Jamus Jerome, 2014. "Institutional quality mediates the effect of human capital on economic performance," Policy Research Working Paper Series 6792, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6792
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    Cited by:

    1. Altinok, Nadir & Aydemir, Abdurrahman, 2017. "Does one size fit all? The impact of cognitive skills on economic growth," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 176-190.
    2. Jonathon Adams-Kane & Jamus Jerome Lim, 2016. "Institutional Quality Mediates the Effect of Human Capital on Economic Performance," Review of Development Economics, Wiley Blackwell, vol. 20(2), pages 426-442, May.
    3. Francesco Pasimeni & Paolo Pasimeni, 2016. "An Institutional Analysis of the Europe 2020 Strategy," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 127(3), pages 1021-1038, July.
    4. Jeroen Klomp & Jakob Haan, 2013. "Political Regime and Human Capital: A Cross-Country Analysis," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 111(1), pages 45-73, March.

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    Keywords

    Economic Theory&Research; Governance Indicators; Emerging Markets; National Governance; Debt Markets;

    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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